Regions Financial Corporation (RF) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corporation Quarterly Earnings Call. My name is Shelby, and I'll be your operator for today's call. I'd like to remind everyone that all participants all lines have been placed on listen only. At the end of the call, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Dana Nolan to begin.

Thank you, Shelby. Welcome to Regions Second Quarter 2018 Earnings Conference Call. John Turner, our Chief Executive Officer, will provide highlights of our financial performance; and David Turner, our Chief Financial Officer, will take you through an overview of the quarter. A copy of the slide presentation as well as our earnings release and earning supplement are available under the Investor Relations section of regions.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today's presentation and within our SEC filings. These cover our presentation materials, prepared comments as well as the question-and-answer segment of today's call. With that, I will now turn the call over to John.

Thank you, Dana. Good morning and thank you for joining our call today. Let me begin by saying that we are pleased with our second quarter results. Our performance clearly demonstrates that we are continuing to successfully execute our strategic plans, building long-term sustainable growth while delivering value to our customers, communities and shareholders. Our reported earnings from continuing operations of $362 million reflected an increase of 21% compared to the second quarter of the prior year. Importantly, we delivered solid revenue growth while maintaining a focus on disciplined expense management. Of note, adjusted pre-tax pre-provision income increased to highest level in 10 years. In addition, this marks another very strong quarter with respect to asset quality, as virtually every credit metric improved. In terms of the overall environment, we remained encouraged by improving economic conditions as well as continued improvement in customer sentiment. We remain focused on generating prudent and softer loan growth, while also meeting the evolving expectations of our customers. Once again, we are proud of our robust capital planning process. Our plan of capital actions received no objection in the recent CCAR results, and we're set to deliver a robust return of capital to our shareholders, while maintaining appropriate levels to meet customer needs and support organic growth. With respect to our business strategy, we are committed to the diligent execution of our plan and are making notable progress with respect to our Simplify and Grow strategic initiative, while much has been accomplished, the process is ongoing, and we currently have approximately 40 initiatives underway, ended accelerating revenue growth, driving operational efficiencies, expanding use of technology and ultimately further improving the customer experience. Through this continuous improvement process, we aim to deliver consistent and reliable results over the long-term. For a while now, we've been speaking about four key strengths we believe to provide considerable momentum for Regions. First is our asset sensitivity and finding advantage, driven by our low cost and lower deposit base. This provides significant franchise value and a competitive advantage, particularly in a rising rate environment. Second relates to asset quality. We experienced another quarter of broad-based improvements in credit quality and continue to expect modest improvement throughout the remainder of the year. Further, we believe the de-risking and portfolio shaping activities we have completed, combined with our sound risk management practices that positioned us well for the next credit cycle. Third, our capital position supports additional capital returns as we move towards our target Common Equity Tier 1 ratio. The execution of which was again validated through the recent CCAR process. And finally, we expect additional improvements in core performance overtime through our Simplify and Grow strategic initiative, which is well underway as evidenced by our actions today. As we look ahead, Regions is well positioned and we're building momentum every day. We have clear plans and a strong team, and our focus on effectively executing our plans while adapting to the ever changing environment remaining steadfast. We do not anticipate major changes to the Company's strategic direction. Going forward, we will build on the solid foundation already established, delivering consistent and reliable financial results, and creating a culture of continues improvement our priorities. Providing best in class customer service and unwavering commitment to our associates and communities will not change. Grayson Hall led the Company through one of the most challenging periods in our industry's history. His leadership and commitment has positioned the Company well for the future. On behalf of our associates, we thank Grayson for his 38 years of dedicated service, and I personally want to thank him for his guidance, counsel and support. With that, I'll now turn it over to David.

Thank you, John, and good morning. Let's begin with average loans. Adjusted average loan balances increased $382 million over the prior quarter, driven by modest growth in both the consumer and business portfolios. Growth in the consumer portfolio was driven primarily by our expanded point of sale partnerships as well as residential mortgage and indirect vehicle lending. Average loan growth in the business lending portfolio was again driven by C&I lending, primarily from our specialized lending areas. Consumer lending should continue to produce consistent loan growth across most categories, and C&I should continue to lead growth within business lending. Headwinds associated with previous de-risking efforts in our investor real estate portfolio have slowed, and as a result, we have begun to see a loan growth on an ending basis largely in our term real estate product. Let's move onto deposits. We continue to execute a deliberate strategy to optimize our deposit base by focusing on valuable, low cost consumer, and business services relationship deposits while reducing certain higher cost brokered and collateralized deposits. As a result, total average deposits declined modestly during the quarter; however, average consumer segment deposits experienced solid growth of over $1 billion consistent with our relationship banking focus. Our deposit advantage has generated from our granular and loyal deposit base. During the second quarter, interest-bearing deposit cost totaled 38 basis points by total funding cost remain low at 52 basis points illustrating the strength of our deposit franchise. Cumulative deposit betas through the current rising rate cycle are only 14%, and importantly, consumer retail deposit betas remained low at approximately 1%. As expected, commercial deposits have been more reactive with a cumulative beta of approximately 44%, driven primarily by large corporate and brokered deposits. We believe our large retail deposit franchise differentiates us in the marketplace. As such, we are in a position to maintain a lower deposit beta relative to peers. Our customer base is also highly engaged with over 55% of consumer checking customers utilizing multiple channels and more than 75% of all interactions are now digital. The number of active mobile banking customers has increased 12% compared to the prior year, and active mobile deposit customers has more than doubled. We continue to focus on being our customers' primary bank as 93% of our consumer checking households include a high-quality primary checking account. So, now let's look at how this impacted our results. Net interest income increased 2% over the prior quarter and net interest margin increased 3 basis points to 3.49%. These increases were driven primarily by higher market interest rates and prudent deposit cost management. With respect to full year 2018, the current market expectation for the fed to continue increasing rates combined with better than forecasted deposit pricing will likely push NII towards the upper end of our 4% to 6% guidance on a non-fully taxable equivalent basis. Specific to the third quarter of 2018, current market expectations for our rate increase in September along with similar deposit betas to what we have experienced in recent quarters are expected to result in another solid quarter of growth in net interest income along with modest net interest margin expansion. Remember, the third quarter will have one additional day that will benefit net interest income, but reduced net interest margin. We also experienced a good quarter as it relates to fee revenue. Adjusted non-interest income increased 2% with growth across most non-interest revenue categories during the quarter. Keep in mind, the first quarter benefited from net gains associated with the sale of certain low income housing investments, and a positive valuation adjustment associated with a private equity investment totaling $13 million that did not repeat this quarter. These gains were included in other non-interest income. With respect to corporate fee revenue categories, the Company's investments in capital markets continue to pay off as a business delivered another record quarter. Revenues totaled $57 million with all businesses within capital markets contributing. The second quarter increase was led by merger and acquisition advisory services and the customer derivative activity. Consumer categories remain an important component of fee revenue. To that point, service charges and card and ATM fees grew by 2% and 8% respectively. This growth has been aided by year-to-date checking account growth of approximately 1.2%. In addition, revenue growth was supported by an increase in debit transactions of 9% and an increase in credit card spending of 10% during the second quarter. Mortgage income remained stable during the quarter despite seasonally higher production due primarily to a 25 basis point reduction in gain on sale. While production is lower across the industry, we continue to expect better performance relative to peers due to our historically higher mix of purchase versus refinance volume. We continue to evaluate opportunities to grow our residential mortgage servicing portfolio, and during the quarter, we reached an agreement to purchase the rights to service approximately $3.6 billion of mortgage loans, with an expected close date of July 31, 2018, and it's subject to customary closing conditions. Increasing servicing income is expected to help offset the impact of lower mortgage production. Wealth management income was up modestly in the quarter driven by 12% increase in investment services fee income. Let's move on to expenses. On an adjusted basis, non-interest expense increased approximately 2%, attributable primarily to increases in professional fees and expenses associated with Visa Class B shares sold in the prior year. Excluding the impact of severance charges, salaries and benefits decreased approximately to 1%, reflecting staffing reductions and lower payroll taxes, partially offset by annual merit increases. As a result of our efforts to rationalize and streamline our organization, staffing levels declined by 340 full-time equivalent positions compared to the prior quarter and approximately 1,100 full-time equivalent positions compared to the second quarter of the prior year. Year-to-date, full-time equivalent positions have declined by approximately 700 positions. Further salaries and benefits expense reductions are expected in the third and fourth quarters as approximately 500 additional position reductions will benefit the run rate. Keep in mind, these numbers do not include the 644 position reductions associated with Regions insurance. In addition, we continue to take a hard look at occupancy expense and will exit approximately 500,000 square feet this year benefiting 2019 and beyond. This amount does not include another 200,000 square feet of reductions associated with Regions insurance. The adjusted efficiency ratio was 60.4% down slightly from the prior quarter, and through the first six months of 2018, the Company has generated 2.7% of adjusted positive operating leverage. For full year 2018, we continue to expect adjusted positive operating leverage of 3% to 5%, relatively stable adjusted expenses and adjusted efficiency ratio of less than 60%. Let's shift to asset quality. Broad-based asset quality improvement continued during the quarter. Non-performing, criticized and troubled debt restructured loans, as well as total delinquencies all declined. Non-performing loan excluding loans held for sale decreased to 0.74% of loans outstanding, the lowest level since 2007. Net charge-offs totaled 32 basis points of average loans and 8 basis point decline from the prior quarters adjusted ratio. The provision for loan losses approximated net charge-offs during the quarter and included the release of our remaining hurricane specific loan loss allowance of $10 million. The allowance for loan losses totaled 1.4% of total loans outstanding and 141% of total non-accrual loans. Let me give you some brief comments related to capital and liquidity. As John mentioned, we are pleased with our CCAR results and remain committed to maintaining prudent capital ratios while possibly investing in our businesses for future growth and delivering a solid return of capital to our shareholders. On July 2nd, we completed the sale of our Regions interest subsidiary, the after-tax gain associated with the transaction was approximately $200 million and Common Equity Tier 1 capital generated was approximately $300 million. Our capital plan incorporates the capital generated from this transaction, and it is included in our board authorized share repurchase program for up to $2.03 billion in common shares over the next four quarters. Subject to our board's approval, the plan also includes a 56% increase in Region's quarterly common stock dividend to $0.14 per share beginning in the third quarter. Regarding 2018 expectations, our full-year expectations remain unchanged and are summarized again on this slide for your reference. So in conclusion, we are pleased with our second quarter results and believe our Simplify and Grow strategic initiative along with other opportunities and competitive advantages position us well for the remainder of 2018 and beyond. With that, we thank you for your time and attention this morning, and I'll turn it back over to Dana for instructions on the Q&A portion of the call.

Thank you, David. As it relates to Q&A, please limit your questions to one primary and one follow-up to accommodate as many participants as possible. We will now open the line for your questions.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from John Pancari of Evercore ISI.

On the loan growth front, I want to see if you can give us a bit more color on the, where you see shift of the drivers of loan growth through the back half coming from, and your full-year outlook of low single-digits and it seems like at this point you might be trending at the lower end of that. Do you see it that way? Or do you think you can break to the upside a little bit through the back half?

Well, I would say first of all, we are affirming our current guidance for low single-digit loan growth excluding the run off this targeted and indirect portfolio and the TDR sales obviously. By focus on the consumer side of the business, we feel pretty good about our forecast and we look at mortgage, we expect it generally to be flat. I think we see raw in the HELOC portfolio and the balance of our consumer business should grow modestly, we believe across most of the sectors and the remaining part of the year. On the corporate side of the business, our pipelines are good. They have improved since the first quarter and they continue to be pretty solid. Our customers are optimistic, but I would say there is still a bit cautious. We're seeing customers use a lot of their liquidity to fund their additional borrowing needs or what would have traditionally been additional borrowing needs and you can see that in some of our deposit balances. But generally if you think about our business in the three segments that we think about them, the corporate banking business, I think will grow modestly through the balance of the year largely as a result of activity within our specialized industries group and more narrow targeted focus by our diversified industry's bankers, and we've seen both of those teams have some success in the first part of the year. In the traditional middle market commercial banking and small business banking, we have renewed focus there that we are beginning to see really get some traction. Owner-occupied real estate which have been running off at a pretty rapid rate through I guess over the last 10 years has really begun to slow and that will help us, we believe see some additional loan growth through the balance of the year. And then finally in real estate, we had indicated we thought in the second quarter we would begin to see some modest growth. You remember that we have been de-risking that portfolio exiting many of the multifamily construction when loans that we have in the books and that has been successful I think, term lending was very competitive, it has begun to have a positive impact on our portfolio. So, we saw some nice loan growth at the end of the quarter and in real estate banking, and so all-in-all, I think our guidance is solid. I would not say that at this point we guide towards the upper end of range, I think it would be lower end to the middle of the range. But we do believe that, we will achieve those objectives, and if, we do we will meet all of our other targets as a result to that.

Then in terms of your margins, I saw some pretty good expansion again this quarter and probably would have even been higher, it’s not for the leverage lease transaction. But just wondering are the impairment that is, I want to get your updated thoughts on the sensitivity to the ongoing fed moves, but also rising betas? What's your updated sensitivity to each incremental 25 basis point that hike?

I think John, so our -- this is David. Our expectation for the year is -- our beta thus far is 14% as I mentioned earlier. We do think that picks up with the back half of the year, but if we look at 2018, we think the beta in 30% ranges is what's baked into the guidance that we've given you. Thus far, we've outperformed our expectation on beta, and rates have come in faster than we had anticipated as well. And so, we are reiterating our guidance on net interest income growth this year to the higher end of that 4% to 6% range, we think we can get the higher end of that. As it relates to next quarter, we think will have another solid quarter of growth in NII, and we think our margin will grew modestly because it has overcome about two points of for the next quarter. So, I think that we feel very good about our expectations.

Our next question comes from Jennifer Demba of SunTrust.

Just wondering, if could clarify what you're M&A interest and capacity is at this point?

Sure. We have an M&A team they are charged with finding both bank and non-bank opportunities, and we've had some success acquiring non-bank businesses, mortgage servicing rights and other loan portfolios in fact we point to BlackArch Partners and that investment is being a real half point in the quarter in terms of their contribution. And we will continue to look for those kinds of opportunities because non-bank opportunities help us fill gaps and our capabilities meet customer needs and importantly row and diversify revenue. Bank M&A is a good bit more challenging, and we think about where Regions trades relative to our peers, we are trading relative to targets I would say, likely targets. We are trading at a discount, and as a result, the economics just don’t work for us. We look at our plans and our opportunities and we think they're significant. We benefit from rising rates. We have a good plan to return capital to our shareholders which should generate outsize returns. We think through our Simplify and Grow initiatives that there is a real opportunity to improve our core business. And so, we're just not going to do a transaction that would be significantly dilutive to our shareholders and in this environment. Let’s not say that we’re not going to continue to look, we will do that. We learn as we do. We’re going to be very conservative, very thoughtful. We will seek to build relationships with potential sellers. We will watch the market, but we’re going to be very disciplined in that regard, principally because again, we have the opportunity we think to take advantage of a number of other levers that will drive outsized returns for shareholders.

Your next question comes from Ken Usdin of Jefferies.

In terms of the balance sheet mix, you haven’t had a lot of earning asset growth, which is allowed you to be I think in part so disciplined on the deposit side. How much more shrinkage do you think you could see in terms of the interest-bearing -- sorry, the non-interest-bearing deposit side? And at what point do you think that you might have to just go out into the market and just to keep up, with hopefully is -- now a better trajectory on loan growth side?

Again, this is David. So you mentioned us being disciplined on pricing on the deposit side, but I would tell you, we've been very disciplined on the left side of the balance sheet. We want to grow loans. We did grow loans this quarter, but we’re going to remain very disciplined, making sure that when we layout capital to our customers to serve their needs that we paid and we have an appropriate return on capital that we put out. We have a low loan to deposit ratio relative to our peers. And staying disciplined unless on the left side of the balance sheet, let’s us be even more discipline on the right side. You are correct to see that not interest-bearing deposits have been put work, a lot of that has been on the corporate banking side where corporate banking customers are looking for alternatives to generate yield. Some of that's gone into interest-bearing accounts with that. Some of that's been utilized as John mentioned earlier to fund capital expenditures and put the excess cash to work, and but at some point we believe, those actions will dissipate and we'll be to grow loans. We are constantly looking for relationship deposits, whether it'd be on the consumer side of the business service side. That will always be important to us. But we don't see any need in the near-term to have to go out and bid up deposits from a cost standpoint. That being said, we do have promotions like others do and we will look at opportunities to strengthen the market, leveraging that, but wholesale changes in our deposit structure is not in the order at this point.

Yes, I will just make another maybe two points, Ken. One is, if you look at growth in consumer deposits, we grew demand deposits in the consumer business by 6.4% year-over-year and continue to see good growth in checking accounts and household. And so, we believe that we will see nice steady growth on -- in consumer deposits. The second thing I would say is. We are again reiterating our guidance for low single-digit deposit growth through the -- end the year. And so, we do expect that will continue to grow deposits and finish the year with little growth.

Next question comes from Steve Moss of B. Riley FBR.

On the commercial real estate growth, here, I was just wondering we’ve heard more comments around competition and tighter spreads. Wondering, what you guys are seeing as relates to that? And what types of properties are driving growth?

Yes, so a great question. We are seeing a lot of competition particularly in that term lending product. Spreads have compressed 50 basis points or more since to the beginning of year. We've had to be very selective in seeking out opportunities in the space. The growth we've had, though modest, has been in multifamily and office primarily where think we have a good expertise. This audience that -- we have been managing that portfolio very actively for quite some time and today it represents about 7% of our total loan portfolio down from, at one-time bar in the 30% range back during the crises. So, we believe it's a business that we can and will continue to grow modestly and provide really nice fee income opportunities for us, and you see that in our capital markets business and improving. Also presents an opportunity for us to grow deposits as we begin to develop more relationships with the owner operator customer who is the term lending customer. So we will grow it modestly, but carefully and again manage it I think very judiciously.

And then on the securities portfolio here, I'm wondering what your thoughts are on the balances going forward as the yield curve has narrowed? And what are your thoughts, if they convert in the next couple of quarters?

Yes, so in terms of the level of securities or the percentage for earnings assets, we don’t anticipate any significant change there. If we do get some liquidity, LCR relief, we may change out some Fannie Mae securities and put them to work more effectively. But right now, we think that we just continuing to manage the book like we are with the same duration. We have a lift coming from fixed price lending and our securities book, even if rates stay flat to where they are right now as we re-rate some $12 to $14 billion worth of assets over a given year. So an inversion that you spoke, we think would be more central bank driven than a precursor to a downturn. And even with that and if rates have shifted up and re-pricing comes through, we still have a very significant tailwind in help us to continue to growing NII.

Your next question comes from Saul Martinez of UBS.

I wanted to ask about loan yield. Your C&I yield obviously picked up with the higher rates, but significantly less I think than a lot of other banks who benefited from this blowing out of LIBOR relative to the fed funds rate and maybe the leverage lease trend right down had maybe on the margin something to do with it. But I'm curious, why you're not seeing a bit more of a yield pickup as some of your yield or some of your competitors have? And does it have to do with hedging strategy? Does it have to do with the structure? But it's been over the last few quarters about 10 bps sequential with every rate hike. So I'm curious, why if there is something there that is different about your C&I growth or how you manage through the portfolio?

I'll take a shot and maybe David can follow. Typically when our C&I business has been very much of the relationship oriented business going back a very long time is generally built around our core markets Alabama, Mississippi, Tennessee where we have very long and deep relationships. We enjoy a significant demand deposits associated with those relationships in that business, and while we don't -- as we look at our peers typically don't get the same yield on the loan side of our business. We enjoy we think a greater demand deposits and so we view it from a relationship perspective. We think that there's a fair trade-off there that’s part of it. Another part of it is that we have been seeking to grow both our government and institutional banking business, which is a little more competitive, and yields are narrower, and separately, we've been working hard to stem the tide runoff in our owner-occupied real estate portfolio. And so, deals there have been compressed a bit to.

I'll add other thing and really you got to look at the whole relationship first, taking apart loan side versus deposits. But we didn't have the leverage lease impairment $5 million you pointed out, that's about three basis points of that change too. So that’s other piece of this.

Yes, it's just kind of hard to triangulate though, if some of your peers having 30 bps to 30 plus bps, yield pickup sequentially pointing to the higher LIBOR, and you guys have been pretty consistent at 10 basis points for quarter when you have a rate hike. So, everything you said make sense, but I want to know if there is anything -- it has anything to do with how you -- because hedging strategy and structure of the loan because it seems like there's a bit of a disconnect versus what we've seen some of the other banks reported.

So, you got to look at mix, you have to look at everybody's hedging strategy. But if you look at our assets sensitivity, 25% of its on the short-term, 25% of its on the middle term and 50s on the long end. So that will have a little bit of the dampening impact in terms of rate increases that move up. And so, I think that it's really hard to compare peers to peer. There are a lot puts and takes on it.

If I could just get in a quick one, the indirect other consumer obviously growing pretty, pretty well the green sky. But where do you think -- can you remind us, where you think that book can grow to in terms of absolute size over the next year or two?

So, we do have limits in terms of how much we want, our indirect other get to. Right now, our indirect other consumer about a 7 billion, we’re looking at that number to be in that $2 billion range. So, some growth there, but not a extraordinary growth.

2 billion by year end.

I would say overtime, yes.

Next question comes from Geoffrey Elliott of Autonomous Research.

Maybe following up on the earlier discussion on M&A. Can you kind of outline both on the non-banks side and the banks side either from a product point of view or geography points of view, other areas where if the prices rise and the economics will rise you be particularly interested from a strategic perspective?

With respect to non-bank, I think our focus has been on, as I said earlier, adding capabilities so whether it'd be in capital markets or in wealth management as an example, adding products capabilities that help us fill gaps to meet customer needs. We've been acquiring loan portfolios, mortgage servicing rights, and those things and we'll continue to do. We have capacity within our mortgage servicing operation. I think we do that well and so we will continue to likely add to that portfolio. On the bank side, typically our interest is going to be in footprint. We talk about size and I think that ranges, but our conversations have been in the $3 billion to $15 billion kind of range. We're not interested, as I said earlier, and doing the transaction that would be a significantly dilutive intangible book value and earned backs are important to us. I hope that gives you a little bit of perspective.

And then, a quick one on the CCAR, it looks from the CCAR results like there is some preferred issuance baked into the ask, as I think there was last year as well. Could you discuss a little bit what those you confirm that's the case? And then discus the circumstances when you'd be expecting to issue preferred?

So, Geoffrey, originally, we had a preferred issuance build in, but that was in 2019. We do need to continue to watch changes regulatory changes with regards to the SAB in terms of how that might impact our capital ratios, in terms of will it have us, have more common and therefore negate the need to have preferred stock overtime. There is more to come there, but we want to make sure that so we have an appropriate amount of capital Tier 1 and Common Equity Tier 1. Our focus right now in the short term has been to get our common equity down to our 9.5% target range, and as we do that, we need to make sure we backfill appropriately for Tier 1. And if we don't get relief through the SAB, then we'll a preferred issuance in their right now baked in '19.

Your next question comes from Matt O'Connor of Deutsche Bank.

I was wondering if you can talk about the kind of relationship of provision expense to charge offs, look at the next few quarter obviously this quarter, I was very close to matching after a couple of quarters of released, but with loans starting to grow again here. I'm wondering if you give some color on that.

Yes, I think you will continue to see a match provision to charge off and there could be a slight build relative to the loan growth as one would expect.

Okay, and in terms of the loans that you are adding now, say the indirect consumer which is in that bag, but the growth that you are getting their in terms of some of the other portfolios. Are they given the lost content of what's being added as higher than what's lending off? Or is it still some kind of underlying de-risking, I would say whole back we runs off of things like that?

I think we're going to see some modest improvement in our numbers across all of our portfolios over the balance of the year, definitely, and what we are putting on the is that very high quality, very happy with it. What we're seeing with those loans is in fact they are performing very well and we would expect them to continue to perform well, including better than those that are paying off.

Your next question comes from Betsy Graseck of Morgan Stanley.

I knew that there is -- you've mentioned briefly some, what trajectory is Simplify and Grow is. But maybe can you give us a little bit of color to the kinds of actions that have been taken pass quarter or so? And how you expect the operating leverage trajectory to shift from here, as at the run rate that we been seeing over the last year or so? Or do you feel that we’re moving into a peer where there could be a little bit more acceleration in that trajectory?

John Owen is leading that work. I asked him to answer your question and you maybe David could follow on as well.

Good morning everyone. We’re making good progress on Simplify and Grow initiative is. We said earlier we got about 40 initiatives that are underway. We started this about seven months ago and I think we're off to a really good start. Let me give you a couple of examples of products we have underway. I think that might provide some color and background. First, let focus on to be our consumer lending space, we got a team working on how we take all of our consumer lending categories and make them fully 100% digital, meaning a customer can come in and start a digital channel whether it's a mobile device, iPad or laptop, start there and face that loan complete digital. We’re going to do that for all consumer loan categories for well down the road in that process. I will tell you by the end of 2018, we will have the majority of that work done. There will be something we will spill over into 2019, but example of some of the changes we've made, I take the mortgage application process. If we reengineered that process, we’re going through second half about half of the day requirements for the application. That's taking the application time, down from over 15 minutes under 5 minutes. The other thing seeing is a huge shift in adoption in terms of filling out your application in digital format. In December only about 20% of our apps were filled out in the digital space. We’re now about approaching 60% of our application still down the digital space. The other one I would point out, the other initiatives is on our commercial lending process. We've gone through and really put a dedicated team focus at, how do we reengineer that process really with the goal being for us to get a faster answer back to customers. So from applications time to, yes or no to a customer, we drop that by about 70%. And so team has done a great job of making banking much easier for our commercial customers. The last one I would point out would be in our contact center area. We've gone through and used IBM Watson in our contact center really to provide some assistance to our reps, so they can better assist our customers. Couple of use cases that we have deployed, the first being, for certain call types Watson actually take the call, handle the call with the customer, and service that call right there with Watson. We've had about 700,000 calls already year-to-date that Watson has handle that call from start to finish. That’s equivalent to about 55 contact center reps in that initiative alone. The other thing we've done as we gone through and really tried arm our reps with to be able to have quick fast answers back to customers, and we have Watson so that almost in a chat mode. So a customer -- I mean, a rep can actually ask Watson questions when they have a customer on the phone. They have done that 700,000 times year-to-date. And so, a lot of good work there, a lot of good energy. As David mentioned earlier about headcount, and one of the things that if you think about headcount and also corporate real estate, those are two big indicators that you can watch to see us while we're making progress on our Simplify and Grow strategy. We’re down about 770 positions through June and that's a direct result of management actions that had been taken with these 40 plus initiatives that are out there. Also Regions insurance closing on July the 2nd, that's about 644 positions eliminated there. And in the balance of the second half of the year, you will see Simplify and Grow impact probably another 500 positions in the second half of this year. That's over 1,900 positions and what I would tell you is, that will really show up in 2019 when we get the full run rate. The last point I would make would be on a real-estate side. We've got a good opportunity to continue to reduce our space across the bank. We will be down about 700,000 square feet this year. We expect that trend to continue.

So, Betsy, I'll add to that. So, operating leverage today is 2.7%. We are reiterating our guidance of 3.5% for the year. We get there both by having improvements in revenues whether it'd come from rate balance sheet growth, Simplify and Growth initiatives helps through revenue, and then continuing to watch our cost for the remainder of the year. You will see the benefits that as John just mentioned really ramp up in the third and fourth quarters, such that, gives us confidence that, not only we're going to meet our operating leverage target, but we're also getting our efficiency ratio below the 60% level.

Got it. That was a really helpful color. It sounds like you are well prepared for that question. Yes, exactly one other just a separate topic, but David on the capital, I know we talked a little bit about capital and capital return already. Just especially sense the insurance acquisition -- or insurance I sorry, sale is happening this year. Is there any opportunity to do a mid quarter task or a de minimis as well in terms of capital return?

Well, so, we had baked into our submission to the extent we generate the capital that we were also going to be able to include that and that is in the numbers that you see. So that $300 million has already been asked for. So, there is no need to go back. There is always an opportunity to do back on the de minimis. The de minimis is a fairly small number now and we will have to see circumstances changes. We do not anticipate that, but it's always an option.

Your next question comes from Peter Winter of Wedbush.

I just wanted to follow up on the efficiency ratio looking out longer term, if you're still targeting, bring it down to the mid-50s. And over what timeframe, do you think you can get there?

So, we've been pretty focused on our '18 to just kind of make sure we meet that. It's the third year of our three-year plan we laid out at Investor Day in November of '15. Now, we are going to have our Investor Day in February of '19 where we will have our scorecard on what we told we are going to do. And that we're going to be laying out expectations for the next three years. You've heard me I mentioned before, I think our industry is going to have to begin more efficient overtime, and I think we will certainly do that. And I think targeting something in the 50, mid 50s to maybe even better than that overtime is on the table. I think you should see us through Simplify and Grow initiatives to get just a little better each quarter, but when can we hit that mid 50s, we haven't really gone out and said that. You're going have to wait and show up in February to here. But I think in the not too distant future, we could actually get there.

Yes, I would just reiterate that. I think we’re very focused on continuing to improve the efficiency of our operations. And we'd make the point there our Simplify and Grow initiative, we try to be clear that is not a program, it's really about making a cultural shift here at Regions. It's about developing a culture of continuous improvement. We've got to always be looking for how we do we make it easier for our customers and banker do business? How do we improve our processes? How do we drive efficiency to be more effective and deliver more value for our shareholders? So, we are very committed to doing that.

And just a follow up, if I look last year, the share buyback coming out of CCAR. You frontend loaded that buyback. Should we expect kind of similar type trend this year?

Well, we haven’t led out our timing, Peter, but we have a pretty, pretty tall order to get that done as soon as possible and that's our goal. We are carrying excess capital right now that's really been an anchor from a return standpoint and we would like to get back capital right size, sooner rather than later. So I'll leave it back.

Your next question comes from Erika Najarian of Bank of America.

Just one follow-up question for me. You've mentioned that 93% of our container deposits have high quality checking accounts tie to them. Obviously, the consumer beta stands at 1% on accumulative basis. I guess I just want to make sure I am understanding the message correctly a lot of your peers are starting to die towards more aggressive betas going forward. Is it that a lot of your consumer retail accounts are transactional and don’t have that excess cash that potentially could rotate away from Regions into some of these online offering? Are we reading that correctly?

That’s a big piece of our deposits base and that’s why it's been fairly stable, that’s why it was our beta was low last time, that’s why we think it will be low this time. And we have the core checking account of our consumer base. And that is really, really important, very granular average deposit of about $3,500 in account. So, that’s what makes us unique and that’s how we win from a beta standpoint.

Your next question comes from Christopher Marinac of FIG partners.

Thanks David. I had a similar question as Erica, but just want to look at it from the angle of the non-metro markets. To what extent does that keep working for you as we get further along in the right cycle? Is that still a benefit that you have?

Yes, absolutely. We think it's foundational to who we are and non-metro markets, that’s a big part of our deposit base. It's not just deposits but as a whole relationship that we have these customers that are very loyal to us, and we dominate in those market. So it's important for us to continue to provide good solid customer service and we will retain those deposits, which we think again is foundational and really is a differentiator. We've had this strategic advantage for a long time, but without rates rising someone, we couldn't extract value until now. And so, we think that continues on -- in the future. Now offset to that is, our growth relative to some of those smaller markets is it as robust as some of the major metro, which is why you see us -- you've have seen us make some investments in major metros like Atlanta where we can capture some of that faster growth, but we don’t want to abandoned that core customer base in the smaller markets. So, that's really our strategy on both sides.

Is there a way to pinpoint the rate advantage between metro versus non-metro even in just on the big picture context?

We can get back to you on that Chris.

Your final question comes from Gerard Cassidy of RBC.

David, can you share with us -- in the securities portfolio, I think, you said that about $12 billion to $14 billion is reinvest every year. Did I hear that correctly?

That's total assets. Gerard. It's probably 2 billion to 3 billion in the securities book and about 10 to 11 in the loan book.

In the securities book, what yields are you giving up when it rolls off? And where do you reinvesting? And what is the duration in that portfolio as well?

Yes, so our duration really can't change overtime. We are in 4 to 4.5 years in terms of duration what's rolling off is in the 250 range and what's going on is about in 315 range. So, that was one of the benefits of operations stay here that reinvest on the maturities again both in securities and loans is a big benefit to us.

And then, circling back to deposits, one of your peer banks talked about they are seeing their commercial customers using their cash to -- for capital expenditures, which is one of the reasons they felt their commercial loan growth was a bit modest. Is there any evidence with your corporate and commercial loan book in talking to our customers that they are drawing down on their deposits for capital expenditures? And down the road you might see the loan growth as they use up those excess deposits?

Gerard, this is John. Yes, we think that is exactly the case and we would point to $500 million is more or less and deposits decline that we think have been directed related to the customers putting that to work It's sort of a -- that's a more specific number than it ought to be more of a round number I guess. But that kind of the runoff that we've seen has I think largely been we believe use our customers to invest in their businesses. And as a result at some point, we think that will translate into additional loan growth.

And then lastly, David, you mentioned that you're outperforming on the beta. Have you guys figured out why the beta so far this year has just moved so slowly? Is it just the nominal rate of interest rates being so low or is there another factor?

Well, I think for us, if you look at our retail base betas of 1% gets back to the makeup of our deposit base and who customers are which was really the Chris' first question I was trying to answer. We go to the business side, we've had a cumulative beta of about 44%. Those are often times large corporate customers that are looking everything rates go up for their fair share, and I think that we have to be prepared for that just like we are on competitiveness from a loan pricing standpoint. But what differentiates us is our intent intense focus on relationship banking, whether it would be on the consumer side or to the businesses side or the wealth side. It's really important for us to maintain the relationship and have all the products and services delivered to our customers and we think that's what helps keeps our data down as well.

I will now turn the call back over to John Turner for any closing remarks.

Just thank you all for participating today. Appreciate your time. Thanks for interest in Regions.

This concludes today’s conference call. You may now disconnect.